An Ideal American Currency: We Can Eliminate Our National Debt
and Heal Our Economy by Reforming Our Banking System
By
Valerie M. Gannon
A thesis submitted in partial fulfillment
of the requirements of the
University Honors Program,
University of South Florida, St. Petersburg
April 29, 2014
Thesis Director: Richard B. Smith, Ph.D.
Associate Professor of Economics, College of Business
1
2
Table of Contents
Abstract
3
Chapter I:
A Currency Defined
4
Chapter II:
Usury: The Borrower is Servant to the Lender
11
Chapter III:
How to create money from nothing:
The Origin of Fractional Reserve Banking
22
Chapter IV:
U.S. Monetary History
26
Chapter V:
Constitutional Wisdom
42
Chapter VI:
The Currency Revolution
47
Works Cited
61
3
Abstract
A currency, as the word implies, should flow through an economy with optimum fluidity and
be maintained in a quantity that facilitates trade and commerce between individuals supplying the
labor used to fuel the corresponding economy. By examining the attributes of a currency, by
definition and in practice throughout history, I will construct a model for an ideal currency for the
U.S. This vision will raise awareness about how a currency should truly function in a democratic
republic, while taking into consideration the inherent limitations of the labor supply and our natural
resources. It will serve as a template for a new national currency based on the same attributes and
goals. In telling the story of how the use of currencies originated and developed into the debt based
monetary systems of today, I hope to cut through mind-numbing economic jargon and make this
story interesting and understandable to anyone who uses money(so pretty much everyone),
especially those who are normally automatically repulsed by any mention of economic thought and
theory.
4
Chapter 1: A Currency Defined
Since money is such an intimate part of our daily lives, its true purpose and meaning seem to
evade any of our careful consideration while we become caught up in its complexities and its
applications to our survival and existence. So let’s allow ourselves, for just a little while, to carefully
consider the very definition of a currency so that we may use that knowledge to increase our
understanding of how a currency should function in an economy.
The word currency is derived from the latin word currens, meaning “running or flowing as of
a river (adj.)”, or “electricity or energy flowing from the sun” (n.). It is closely related to the word
current, meaning “passing in time, belonging to the time actually passing”, (adj.) Currently, (pun
intended), the word currency is most often used to describe “circulation as a medium of exchange”.
Accordingly, in this highly generalized definition of the word, currency is a synonym for money. 1
(Since Money is defined as something generally accepted as a medium of exchange, the terms
“money” and “currency” will be used interchangeably throughout this thesis.) The word currency
can also be used to signify the fact of being in common and present use.
From the definition and origin of the word alone, we can draw three conclusions:
1.
a currency should flow through the economy with ease,
2.
a currency should represent the energy that fuels the economy,
3. and a currency is closely related to time, predominately, present time.
1
www.merriam-webster.com/dictionary/money
5
What is a currency’s purpose within an economy? By definition, an economic system
consists of production, distribution or trade, and consumption or use of limited goods and services
by different agents in a specific geographic location.2 It is worth noting that all of these transactions
within an economy can only occur when two agents agree to the value or price of the transacted
goods or services involved. A currency is the most common expression of this transaction. It
communicates the present value of a good or service in terms that both buyer and seller can
understand and agree upon, and perhaps more importantly, it communicates any future value that
the agents involved in the transaction may obtain as a result of the agreement. Therefore, it could be
said that a currency also functions as a language of trade and commerce.
Economics is rooted in what is known as the “economic problem”. That is, those within an
economy have unlimited needs and wants, and they must attempt to match them with scarce, limited
resources. Resources, or factors of production, are generally placed into three categories: labor,
capital, and land. Labor is human effort, both physical and mental, that is usually measured by
allocating time. Labor markets differ from other product markets in many ways. Most of these
differences arise from the fact that labor is undeniably in-separable from the laborer! Laborers
largely sell their own labor services in exchange for income, so they have control over the amount of
their labor services that they make available, and they often care about the ways in which their labor
is used. Labor is perishable by natural law, since it perishes with the passage of time and ends in
conjunction with the end of the laborers life, which is unpredictable. Labor is regarded as the active
function of production because without labor, the other factors of production cannot produce
anything!
2
http://dictionary.babylon.com/economy/
6
Capital often serves as complement to labor and includes everything else used to facilitate
the production of goods and services, such as factories, machines, tools, infrastructure, and even
human knowledge and skill, known as human capital. Although most forms of capital do not perish
according to natural law like labor does, the value of capital does depreciate over time. Machines
break down or become obsolete…. Bridges need to be widened. …Skills become outdated. ..A
currency is used to assign a value to capital and then used to depreciate that value over it’s useful
life.
Finally, land refers not only to tracts of ground, but all other gifts of nature, like bodies of
water, oil reserves, minerals, etc…“ Natural resources not only generate wealth but also contribute
raw materials to create other types of wealth such as buildings, bridges, machinery and equipment.”3
Since businesses invest capital and employ people to produce, process, market, transport and export
natural resource, natural resource wealth plays an important role in generating employment (labor)
and production of capital. Natural resources sustain human life, but as global population increases,
it will require deliberate human activity to sustain them. A currency typically places a value on
natural resources as they are extracted.
All three types of resources are limited by natural law, in that they only exist, at the present
time, in a fixed quantity. A currency is often used to place a value on these limited resources so that
they can be used in production. Therefore, the quantity of a currency at any given time should
somehow correspond to the amount of resources in the economy at that time; including labor,
capital and land. Our next task would then be to balance this amount with our needs and prioritize
our wants within the limits of our resources. We will revisit this idea in a later chapter.
3
http://www.statcan.gc.ca/pub/16-002-x/2007003/10454-eng.htm
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As previously stated, the word currency is closely related to time, since currency also means
“the quality or state of being current: occurring in or existing at the present time.”4 Incidentally,
currencies are directly integrated with time because nearly everything you would ever consider
purchasing with any currency or even using as a currency takes human time and energy to produce.
Therefore, a currency is and also functions as a claim on human labor, human labor that may or may
not have already occurred. On the other side of the coin, so to speak, the amazingly complex job
specializations that we have today depend on a currency serving as a widely accepted medium of
exchange.
Indeed, any medium of exchange serves as an intermediary used in trade to avoid the
inconveniences, namely the requirement of a coincidence of wants, of a pure barter system. Within
the confines of the barter system, two parties must both, coincidentally, each want something that
the other has, at the exact same time. In the first-ever recorded currencies of ancient Sumer and
Egypt, metals were used as a form of receipt to represent value stored in the form of commodities,
such as grain stored in ancient temples. However, in an era when there really was no safe place to
store value, the value of the currency was only as safe as the forces that defended it, and trade could
only reach as far as the authority of those forces. This led to the metal itself being used as the store
of value.5
Any economics textbook will tell us that money should have at least three fundamental
characteristics.6 First and foremost, money should be a store of value. Gold and silver fulfill this role
quite well because they are scarce, widely appreciated and used, take a lot of human labor to mine,
and since they do not corrode or rust, they do not depreciate in value over time. Any currency that
cannot be stored and remain valuable in the long term fails to solve the coincidence of wants
http://www.merriam-webster.com/dictionary/currency
http://www.reference.com/browse/currency
6 Mankiw, N. Gregory. Macroeconomics. New York: Worth, 2007.
4
5
8
problem of the barter system. A “gold standard”, a currency in which the unit of account is based on
a fixed quantity of gold, can help the currency remain valuable because it serves as a protection
against inflation. The amount of gold in existence, since gold takes a lot of time and labor to mine,
cannot be readily increased. However, the downside of a gold standard, is that it does not allow the
money supply to be increased as a means to stabilize the economy.
Second, a currency needs to be widely accepted as a medium of exchange. Commodity
currencies, based on objects with intrinsic value, are easily accepted as a medium of exchange since
their value is obvious. However, most currencies today are fiat currencies, from the latin word fiat,
meaning “let it be done.” Fiat money has value and it is widely accepted only because a government
decrees it. Almost anything can be (and probably has been) used as a medium of exchange.
The third requirement is that a currency functions as a unit of account, or a measurement of
value. This means that money should be easily and uniformly divisible, as well as fungible. Fungible
goods or commodities are capable of mutual substitution, such as a barrel of crude oil or shares in a
company, where one unit is as good as another. Diamonds, while they function well as a store of
value and are widely accepted, fail the requirements of a unit of account since evenly dividing them
is difficult and destroys their value, and since they vary greatly in quality, preventing mutual
substitution. Metals like gold, silver, and copper are excellent at serving as a unit of account, because
their purity can be precisely measured and uniformly divided.
According to some economists, money also has a fourth essential function as a standard of
deferred payment 7, although this function is not as widely designated as the other three. A standard
of deferred payment is the accepted way to settle a debt. This is also indicative of money’s
relationship to time because in order for money to serve as a standard of deferred payment it must
7
Carter, H., and I. Partington. Applied Economics in Banking and Finance. Oxford: Oxford UP, 1979. p. 26
9
retain its value (or store of value) into the future. Instead of money acting as a medium of exchange
in the present, it is delaying that exchange until a predetermined time in the future, and it uses the
monetary unit of account to state the terms of the debt agreement. Since the standard of deferred
payment function of money actually encompasses the first three functions, there is debate about
whether it should be listed as a fourth function or not.
There have been many historical disputes with respect to the combination of money’s
functions. Some have argued that they need more separation and that a single unit of account is
ineffective at handling them all. One of the arguments is that money’s function as a store of value,
which requires storing the money instead of spending it, conflicts with its function as a medium of
exchange, which requires it to circulate. 8 Quite the opposite, some propose that storing of value and
using money as a standard of deferred payment is just a deferral of the exchange, and evidence that
money as a medium of exchange can be transported across both space and time.
.H. Greco. Money: Understanding and Creating Alternatives to Legal Tender, White River Junction, Vt: Chelsea Green
Publishing (2001).
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Chapter 2: Usury: The Borrower is Servant to the Lender9
The standard of deferred payment function of a currency involves the repayment of a loan,
which is, of course, usually charged at interest. The act of charging interest on loans has been
ridiculed and regulated since ancient times when the practice was known as “usury”. In modern
times, usury is defined as lending money at an exorbitant rate of interest. There are countless
rationales for the censure of usury, which at one point or another has been condemned, outlawed, or
regulated by all of the world’s major religions and economies.
The first known legal proclamation was chisled into a cuneiform tablet in 2400 B.C. by
Enmetena, who ruled over the ancient Sumerian city of Lagash. The purpose of this momentous
document was to return the city to “ama-gi”, or freedom, by canceling all debts of the people. The
literal translation of ama-gi is “return to the mother.” The return of “amagi” was marked by the
return of mothers and daughters, who had been pledged for debts and forfeited to creditors:
“A remission of the obligations
(Ama-gi) of Lagash he instituted
He returned the mother to the child
And returned the child to the mother
And a remission of interest bearing barley loans he instituted” 10
The tradition of releasing humanity from usury continued into ancient Israel and permeated
Judaism and Christianity. The Ancient Hebrew word “andurarum” (translates to liberty, with a root
meaning- “to move freely like running water” (human movement)) was often used to describe the
9
The Bible, Proverbs 22:7, “The rich rule over the poor, and the borrower is slave to the lender.”
10
http://architecturalwatercolors.blogspot.com/2012/05/jubilee-short-history-of-long-tradition.html
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release of bondservants who has been enslaved for debt and were allowed to be reunited with their
families. Ama-gi- and andurarum were “terms for freedom and order [which] all were based on the
idea of freedom from debt and its worst consequences - debt servitude and the loss of one's
customary land-tenure rights.”11
In the Old Testament of the Bible, the prophet Ezekial includes usury in a list of abominable
things, along with rape, murder, robbery, and idolatry.12 In the books Exodus, Leviticus, and
Deuteronomy, Jews are forbidden from lending at interest to one another and discouraged from
lending to others: “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals,
usury of anything that is lent upon usury”13 In the book of Deuteronomy, there is an injunction of a
“jubilee year” every 50 years, when all debts were forgiven and slaves, who had been driven to
slavery by debt, are freed. In the New Testament, Jesus threw the “money changers” out of the
temple in Jerusalem because they were using their monopoly on the supply of the half-shekel coin,
which the Jews needed to pay taxes to the temple, to make exorbitant profits.
Usury is gravely forbidden in Islam as well. The Quran 2:275-276 states: "...those you take
usury will arise on the Day of Resurrection like someone tormented by Satan's touch. That is
because they say 'Trade and usury are the same,' but God has allowed trade and forbidden usury.
Whoever, on receiving God's warning, stops taking usury make keep his past gains -- God will be his
judge -- but whoever goes back to usury will be an inhabitant of the Fire, therein to remain."
Here are some examples of laws throughout history that were aimed at regulating or
eliminating usury:
11
Hudson, Michael. The Lost Tradition of Biblical Debt Cancellations. p.14
The Bible, Ezekial 18:13
13 The Bible, Deuteronomy 23:19
12
12

As early as 1750 B.C. the Code of Hammurabi was the first known legal system to
regulate the interest that could be charged on a loan as a percentage, at 20%,
although, “historical records indicate that many loans were made below the legal
limit.”14

The ancient Greeks began to regulate interest rates between 800-600B.C.

The Romans adopted the “Twelve Tables” and capped interest at 8 1/3%.

In 88 B.C. the Roman usury rate was raised to 12%.15

Aristotle and Plato both believed that usury went against the “natural order” of
things. In Book V of Politics, Aristotle insisted that money was barren, since it
cannot breed more money.16

In 800 A.D. Charlemagne outlawed interest throughout his empire. In 11th century
England, the taking of any interest at all was punishable by taking the usurer’s land
and chattels.

In Medieval Canon Law, Usury was punishable by ex-communication.

In Medieval Roman Law, usurers were fined four times the amount taken, while
robbery was penalized at twice the amount taken.

During the reign of Queen Mary (1553-1558), English Parliament again disallowed
the collection of interest.

During the Reign of Queen Elizabeth (1570), interest rates in England were limited
to less than 10%. This law lasted until 1854. 17
Ackerman, James M. Interest Rates and the Law: A History of Usury, 1981, Arizona St. L.J.61. 1981. p.17
Ackerman, James M. Interest Rates and the Law: A History of Usury, 1981, Arizona St. L.J.61. 1981. p.18
16 Aristotle, Trevor J. Saunders, and T. A. Sinclair. Aristotle: The Politics. Middlesex: Penguin, 1982. p. 87
17
Ackerman, James M. Interest Rates and the Law: A History of Usury, 1981, Arizona St. L.J.61. 1981. p.14
14
15
13
Nearly every nation in the history of the world has done something to eliminate or control
the practice of lending. In colonial America, all of the states in the Union adopted usury laws. Most
states set the interest limit at 6%. However, deregulation in the early 1900s caused 11 states to
eliminate their usury laws, and 9 more states to raise the usury cap to 10-12%. 18 In 1916, the Small
Uniform Loan Law allowed “licensed” lenders to charge interest rates of up to 36%, provided they
adhered to strict standards of lending outlined in the act. Between 1946 and 1979 all states adopted
special loan laws that capped interest rates at the same exorbitant rate of 36%.
Enormous changes in the regulation of usury in the U.S. occurred in the late 1970s and
1980s. In 1978, the Supreme Court ruled that national banks could export the interest rate of their
home state to any other state where they did business.19 Around the same time, South Dakota
eliminated its interest rate cap, so credit card companies began to set up operations there and
operate nationally with no limitations on what rates they could charge. The Depository Institutions
Deregulation and Monetary Control Act of 1980 called for a complete phase-out of interest rate
ceilings and was the first of many acts in the 1980s and 1990s that deregulated interest rates and
increased deposit insurance protection from $40,000 to $100, 000. More recently, the Economic
Stabilization Act of 2008 increased deposit insurance to $250,000. The increased protection of bank
failures and deregulation of interest rates creates “moral hazard,” because both measures make
banks less accountable for their decisions, and thus more likely to fail. As we have recently seen,
banks become “too big to fail” and as a last resort, are bailed out with freshly created money that is
transferred to the taxpayers in the form of debt.
18
19
Ackerman, James M. Interest Rates and the Law: A History of Usury, 1981, Arizona St. L.J.61 (1981)p.17
Marquette vs. First of Omaha, 1978.
14
Why is usury so bad? In Dante’s Inferno, he places usurers on the lowest ledge in the seventh
circle of hell, lower than violent murderers, violent suicides, blasphemers and sodomites. Dante asks
Virgil to clarify why usury is a sin, and why it is in the category of violent sins against nature and
nature’s God. Virgil explains that usury goes against God’s will because a usurer makes money from
money (in the form of interest) and not from industry or skill “to earn his way and further mankind”
as Genesis stipulates that human beings should. In this manner, usurers go against God’s “art” or his
design for the world. In stark contrast, and much closer to contemporary thought, is Benjamin
Franklin’s Advice to a Young Tradesman, in which he urges: “remember that money is of a prolific and
generating nature. Money can beget money, and its offspring can beget more”. However, money
does not beget anything. If you use money to purchase farming land or equipment needed to
perform a trade, it is not the money or even what is purchased with the money that actually
produces goods and services, it is human effort that is responsible for production. In the case of
usury, money only “begets more” for the lender in the form of guaranteed interest, but it is still due
to the fact that the borrower is putting forth human effort to pay back the loan with interest.
Undeniably, the central problem with usury is that it creates mathematically impossible
demands on the money supply, resulting in debt bubbles, that lead to inflation and deflation. These
dramatic shifts in the quantity of money invariably lead to the destruction of the economy and
horrible suffering by the people within it. As St Thomas of Aquinas, leading theologian of the
Catholic church, asserted, putting money out for the generation of more money is an evil unto itself
because the formal value of money is the face value. Yet usury allows the face value to fluctuate,
and hence the value of money to be reduced, which, St Thomas argued placed an undue burden on
money.
15
Lenders are essentially trying to receive something for nothing, due to the fact that lending
money does not involve any input of human effort (aside from drawing up and signing a contract
and recording the transaction), and the act of lending itself does not actually produce anything. The
borrower is able to take advantage of the possibility of doing something useful with the money;
meanwhile, the lender has done nothing except to make the loan and to expect something in return,
in the form of interest.
But where does this extra money, that the borrower is expected to pay the interest with,
come from? The answer to this question is precisely what has made usury an undesirable practice
throughout history. There are two parts to the answer. In some cases, the banks supply the
additional money needed to make the interest payments on the loan by making more loans through
fractional reserve lending, which will be explored further in the next chapter. It seems that the only
way to pay off the loan, since the bank only creates the amount of money for the loan and not the
interest, would be for the borrower to borrow even more money, which the bank would also create.
While that is the case some of the time, that assumption fails to take into consideration the
borrower’s exchange value of labor. If the borrower earns more money, perhaps by taking on a
second job in order to pay his or her loan payments, his earnings go into the bank to pay the interest
on the loan. Perhaps someone related to the borrower takes a job or works extra hours to help make
ends meet. The point is, all interest is eventually paid for with human effort, from the generation of
new wealth somewhere, by someone, in the economy, or it may be paid, in the meantime, with new
loans that delay that human effort.
But wait, we are getting ahead of ourselves! We missed an opportunity to ask an even more
important question at the beginning of this philosophical discussion on usury: Where did the money
come from that was being lent by the lender to the borrower in the first place? The
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answer is this, and it is even more shocking: In our current monetary system, at least 90% of the
time, the banks create this money by just simply making the loan! Of course these loans are made at
interest, meaning that the money supply must be expanded again, perpetuating a vicious cycle of
exponential growth.
The problem is, increasing the nation’s money supply does not increase the actual wealth
produced by the nation, only an increase in income resulting from the labor necessary to produce
goods and services can do that. Any difference between growth in the money supply and growth in
the economy is absorbed by inflation.20 This means that even those who lend money want to keep
inflation under control. If inflation consumes all of the increase in the money supply, above and
beyond any increases in economic growth, they do not make a profit. This results in the formation
of yet another vicious cycle: the need for perpetual economic growth to offset the increase in the
money supply. While it is commonly believed that our current rate of economic growth is deemed
necessary for a healthy economy and to maintain the standard of living that we currently desire, in
actuality the growth is only necessary because usury exists to begin with.
Exponential growth is growth that has no limit and consequently produces populations that
grow very quickly. Logistic growth is more realistic in life and in nature, in that it does have a limit,
and growth approaches this limit in a sigmoidal fashion. In biology, exponential growth is often used
as a model for the growth in bacteria and virus cultures and other situations in nature where growth
is seemingly fueled by unlimited resources and space. The graph below illustrates the fundamental
differences between exponential and logistic growth.
20
Mankiw, N. Gregory. Macroeconomics. New York: Worth, 2007 .p. 81
17
Source: Brooker’s Biology 2 ed. McGraw Hill 2010.
As we covered in the previous chapter when we examined the definition of a currency and
its role in the economy, economics answers the question of how we match LIMITED resources
with unlimited needs and wants. If we match our limited population and limited resources with
limitless exponential growth in the money supply, we cannot expect the money to function as a
medium of exchange. We are essentially matching our money supply with our unlimited needs and
wants and ignoring our natural environment. Consequently, usury places an unnecessary burden on a
currency, a currency that signifies the hard work of the population and places a value on our most
precious gifts, our natural resources.
If we allow our money supply to grow uncontrollably like a virus, it will eventually weaken
and kill its own host, our economy. Economic development and growth are meant to provide for
the needs of those in the economy and to further mankind as a whole, not to increase profit or
power. Usury itself is a form of speculation, or high risk investing, because it relies on constant
economic growth, which is never a guarantee. The growth of the economy can slow down, for
countless, and totally unpredictable, reasons including but not limited to demographic and
environmental changes, changes in supply or demand of goods and services, and interactions with
foreign economies. Therefore, economic stability, not economic growth should be the goal of a
18
currency and related lending practices, and usury makes growth a requirement for the currency to
function.
Thomas Edison famously summed up the most general of usury’s immoralities in 1921 when
he stood overlooking the water-power developments being made on the Muscle Shoals area of the
Tennessee River and said:
“People who will not turn a shovel full of dirt on the project nor contribute a pound of materials will collect
more money…than will the people who will supply all the materials and do all the work.”21
This idea is not an exaggeration: it highlights the inequality of risk and benefit that lending at
interest exemplifies. For example, consider the purchase of a newly constructed home for $150,000.
The combined cost of the land, building permits, planning costs, and sales commissions is $50,000
and the cost of labor and materials is $100,000. If the person buying the home puts up a down
payment of $25,000, they will need to borrow $125,000. If the mortgage is issued at 7% interest for a
30 year term, the amount of interest paid over the life of the loan is $174,387. In this example, the
interest paid to those that lend the money to build the house is $24,387 more than the money paid
to those who provided the labor and materials to build it and sell it.
Now it is true that the value of this interest also represents the time-value of money; that the
owner of the funds being loaned deserves to be compensated for surrendering the use of his/her
capital for 30 years. But that leads to the assumption that the lender owned the funds to be
surrendered to begin with. It may lead one to imagine that the lender had earned the capital, saved it,
and then graciously decided to lend it out so that a borrower could pay for the construction of a new
home. Now imagine that the lender did nothing to earn the money, so it hadn’t been saved. They
simply decided to loan it out, created it out of nothing, and recorded the exact amount in their
accounting logs with nothing more than a few computer key clicks on a spreadsheet. Of course,
21
Bex, Brian L., The Hidden Hand, Spencer, IN: Owen Litho Service, 1975. p.161
19
such a practice would be deemed fraudulent, and certainly any amount of interest charged on money
that did not really exist to begin with could be deemed exorbitant and usurious.
By now you are probably wondering: How can money be created from nothing? The
money supply of any country consists of both a currency (banknotes and coins) and bank money
(the balance held in checking and savings accounts) Since bank money makes up the majority of the
money supply in most developed nations today, it is owed an equal, if not larger amount of
consideration.
To create our currency, Congress passes a law to increase the debt ceiling in order to allow
further borrowing. Then the government prints and issues U.S. bonds, that are sold into the market.
These bonds can be purchased by individuals, pension funds, foreign countries, virtually anyone
who wants to invest in the U.S. government. The large majority of U.S. bonds are purchased by
central banks around the world, notably today China and Japan. Since these bonds are purchased
with money that already exists, money is not being created quite yet. In order to create new money,
the Federal Reserve buys bonds by transferring money in the amount of the bond to the bank
holding the bond and taking ownership of the bond. The question is: where does this money come
from? The answer is so simple that it can be shocking and difficult to believe or comprehend. The
answer is: the money is created from nothing. It is simply recorded as an entry in the Federal
Reserve transaction log books and printed up and distributed. It would be the equivalent of making
your own checks and writing them out to everyone that you owed money to without even having an
account, just a notebook to record the details of the checks written. For an individual or business,
this would result in counterfeiting and fraud charges, for the Federal Reserve, currently creating 75
billion per month as part of their Open Market Operations and Quantitative Easing (QE) programs,
it is perfectly acceptable and legal.
20
The majority of our money (about 90%) consists of bank money. This money is created
through fractional reserve lending, which allows banks to lend out at least 90% more money than
they have in their vaults. For example, if you deposit $100 cash into the bank, the bank puts $10 into
its vaults and loans the other $90 to someone else. Then that person puts their $90 back into the
bank or pays someone else with it, who then puts it back in the bank. The bank keeps $9 in the
vault and loans out the other $81. Then the $81 eventually makes its way back to the bank and the
bank keeps $8.10 and loans out the other $72.90. So far, the bank has $27.10 in the vault and
$243.90 lent out. This process is allowed to continue until the bank has $100 in the vault and $1000
out in loans. This is a simplified example because obviously the funds don’t necessarily come back
to the same exact bank, but eventually, the funds come back to a bank somewhere and the bank only
puts a small portion in the vault and lends the rest right back out again.
According to the Quantity Theory of Money, the money supply has a direct, proportional
relationship with the price level, and thus the functions of money. Every student of economics today
is asked to memorize the formula, MV=PY at some point, where M is the money stock; V is the
velocity of money, or turnover rate of money; P is the price level; and Y is real total income of the
nation. Although there is much debate on how the quantity of money influences prices, nearly every
great economic mind in recent history, including; John Stuart Mill, Irving Fisher, Ludwig von Mises,
Karl Marx, John Maynard Keynes: and going back as far as Copernicus and Jean Bodin,
acknowledged that there was a relationship.
In order to fully understand this process, let us begin a thorough investigation into the birth
of fractional reserve lending. Then the methodology behind how central banks formed will explain
how usury evolved into an instrument for the creation of money from nothing.
21
Chapter 3
How to create money from nothing! The Origin of Fractional Reserve Lending
Although the first recorded use of paper money was in the 7th Century in China, modern day
banking practices involving paper money and usury became widespread in 17th century Europe.
An example of the first paper money in Europe, issued by the Stockholms Banco in 1666
Source: www.coinbooks.org
Wealthy merchants began to store their precious metals in the private vaults of local goldsmiths,
mainly in London and Sweden, who charged a fee for this service. The local goldsmiths would issue
a banknote, made payable on demand to the depositor, indicating the quantity and purity of the
metal held on their behalf. Eventually the banknotes were made payable to the depositor “or bearer”
which allowed them to circulate as a medium of exchange. In time, the goldsmiths started lending
out additional banknotes for the precious metals at interest, because they began to realize that only
22
a small percentage of depositors would redeem their banknotes at the same time. This meant the
goldsmiths could lend out much more than they had on reserve in their vaults, keeping only enough
to satisfy demands for withdrawls, a revoltingly dishonest practice-because the depositors were
paying a fee for the safe-keeping of their precious metals and believed that they were available for
withdrawl at any time. This pivotal shift changed the simple promissory note into a mechanism for
the expansion of the monetary supply itself, known as fractional reserve lending, and created a new
type of money that was based on debt.
The Industrial Revolution began an era of per-capita economic growth in capitalist countries.
International trade was increasing and along with it the number of banks and banking services.
Significant banking innovations such as security investments, checks, and overdraft protection came
about. 22 During this time average income, (and of course GDP accordingly), as well as population
began to exhibit unprecedented sustained growth and almost every aspect of daily life was impacted
in some way. Before the Industrial Revolution, improvements in Agriculture or Technology
consequently led to an increase in population, which accordingly strained food supplies and other
natural resources, and limited increases in per capita income. This created a condition known as the
Malthusian trap 23 The Industrial Revolution is credited for ending that cycle. New types of financial
activities, like underwriting bonds and foreign loans, performed by new, merchant banks (mostly in
London) facilitated this growth in international trade, population, and income. Two immigrant
families, Rothschild and Baring, established merchant banking firms in London in the late 18th
century and came to dominate world banking in the next century.24
22
23
24
Brown, Richard. Society and Economy in Modern Britain 1700-1850 London, Rutledge 1991. P. 238
Clark, Gregory (2007). A Farewell to Alms: A Brief Economic History of the World. Princeton University Press. P.244
Busch, Andreas. Banking Regulation and Globalization. Oxford: Oxford UP, 2009.
23
It is understandable that maintaining an appropriate quantity of currency in the economy
proved difficult in a volatile economic environment like that of the Industrial Revolution, and it was
made even more difficult during times of war, as evidenced by the currency crisis of 1797 when the
Bank of England suspended cash payments. Although banks were originally private institutions, by
the end of the 18th century, banks were increasingly being regarded as public institutions needed to
protect the health of the financial system and to improve public financing of war. For example, the
War of the Second Coalition led to the creation of the Banque de France in 1800. The formation of
the Bank of England unified political need to raise funds for war and economic need to deal with
the fluctuations caused by the emerging banking industry.
The creation of the central bank mechanism shifted the burden to the taxpayer because the
government, at the taxpayer’s expense, became the lender of last resort. Power became more
centralized because this arrangement effectively granted a monopoly on the creation of money to the
bankers, allowing them to create limitless amounts of money, and gave the government the ability to
borrow limitless money. It just wasn’t enough for the bankers that they were already creating money
by lending out the same money that they were supposed to be protecting; they wanted to be able to
create money that didn’t even exist to begin with! Central banks were established in most European
countries during the 19th century. By the early 20th century, central banking became ingrained in all
major economies worldwide, including the U.S., with the formation of the Bank of North America
(1781), The First Bank of the United States (1791), The Second Bank of the United States (1816),
and the Federal Reserve Act in 1913.
The creation of central banks as a means to stabilize the booms and busts caused by
fractional banking activities, merely shifts the risk and cost of these activities to the taxpayer, and
exacerbates the actual source of the problem: fluctuations in the quantity of the currency. Fractional
24
reserve banking originated in lending money that did not exist. Then the creation of central banking
allowed governments to adopt the practice of borrowing money that did not exist and allowed banks
to create money for lending that did not exist. It is common sense. Charging interest on money that
does not exist is excessive and usurious. The result is always the same: unbridled expansion and
inflation of the money supply followed by a contraction of credit and period of deflation, the booms
and busts of our modern monetary system.
25
Chapter IV: U.S. Monetary History
Throughout History, central banks have had their greatest success in stealing the wealth of
the middle and lower classes of society and transferring that wealth to the richest members of
society, creating what is known as a plutocracy, or ruling by the rich.
It is a remarkable fact that the United States had its first central bank even before the
constitution was drafted. The Bank of North America was chartered by the Continental Congress in
1781 and began operations the following year. Robert Morris, the mind behind the organization and
charter of the Bank, was a member of Congress and superintendant of public finances. He was a
leader of a group of politicians and merchants who supported a powerful centralized government
and wanted high taxes to support a large army and navy. Morris had profited greatly from war
contracts during the Revolution and was widely known at the time as the financial wizard of
Congress. He modeled the Bank of North America closely after the Bank of England. Following
the practice of fractional reserve lending, the Bank was allowed to issue paper notes in excess of
actual deposits. The Bank was made the official depository for federal funds and made a 1.2 million
dollar loan to the government to fund the Revolutionary War, which was still in progress. Since no
other bank notes were allowed to circulate under the charter, and since the notes were accepted at
face value for all federal and state taxes, the notes began to circulate as a medium of exchange. 25
Unfortunately the Bank of North America was riddled with fraud from the very start.
The charter stated that private investors would each provide $400,000 for the initial subscription.
When Morris was unable to raise the required amount, he embezzled gold that had been lent to the
United States from France and had it deposited into the Bank. He then used this gold as a fractional
25
Rothbard, Murray Newton, and Leonard P. Liggio. Conceived in Liberty. New Rochelle, NY: Arlington House, 1975. p.392.
26
reserve base to lend the rest of the money that was needed to himself and his other associates who
were also becoming “investors” in the bank. Less than two years later, the first experiment with a
central bank in the United States ended when “the market’s lack of confidence in the inflated notes
led to their depreciation outside the Bank’s home base in Philadelphia.”26 Its charter was not
renewed and the Bank did not survive beyond the end of the Revolution. Morris’ political power
diminished and he quickly shifted the bank from a central bank to a commercial bank chartered by
the state of Pennsylvania.
Following the termination of the Bank of North America and the Constitutional Convention
“closing the door on paper money”, the United States enjoyed a period of economic growth and
prosperity. That is until, 1790, when Alexander Hamilton, then Secretary of the Treasury, submitted
a proposal to Congress to charter the nation’s next central bank, The First Bank of the United
States. Hamilton had been a staunch supporter of a sound currency during the Constitutional
Convention, but having served as an aide to Robert Morris, he became a leader of the Federalist
movement and began a heated political debate that would consume Congress for decades. On one
side, the Federalists argued that debt was a good thing, if kept under control, and the power to
create a central bank was implied by the Constitution since more money was needed in circulation to
keep up with expanding commerce. The Anti-Federalists, later called the Republicans, were aligned
with the ideas of Thomas Jefferson. Jefferson pointed out that the Constitution did not grant
Congress the power to create a bank, meaning that such power was reserved to the states or the
people. Jefferson believed that allowing banks to create money could only lead to national ruin: “A
26
Rothbard, Murray Newton. The Mystery of Banking. New York, NY: Richardson & Snyder, 1983. pp. 194-195.
27
private central bank issuing the public currency is a greater menace to the liberties of the people than
a standing army” 27 Jefferson also warned: “We must not let our rulers load us with perpetual debt”
Hamilton’s view on debt was this;” A national debt, if it is not excessive, will be to us a
national blessing.”28 He also claimed “no society could succeed which did not unite the interest and
credit of rich individuals with those of the state.”29 This was the view that prevailed after intense
debate, and Congress granted a twenty year charter to the Bank of the United States in 1791. It was
modeled after the Bank of England and was an exact replica of the Bank of North America, with
Thomas Willing, serving as President just as he had served as president of the nation’s first central
bank. It is interesting to note here that Thomas Willing had voted against the Declaration of
Independence as a member of the Continental Congress years before. Eighty percent of the capital
required in the bank’s charter was to come from “private” investors and the other twenty percent
was to be provided by the Federal government, with the prearranged understanding that the Federal
Government would be loaned the exact same amount right back. This “loan” was then used to make
up for a lack of funds by the private investors. When the bank began operations it did so with only
nine percent of the funds required by the charter, which amounted to approximately $675,00030 The
Federal Government took its 2 Million dollar investment and converted that into 8.2 Million
borrowed over five years. The freshly created millions were pushed through the economy through
government spending programs, once again creating an imbalance between the money supply and
the supply of goods and services and causing inflation to rise by 72% over the same five year period.
It was this federal debt that caused Thomas Jefferson to exclaim:
27
Jefferson, Thomas, and Paul Lancaster Ford. The Writings of Thomas Jefferson 1816-1826. Estados Unidos: Putnam's,
1899. p.31
28
Makin, John H. The Global Debt Crisis: America’s Growing Involvement.New York: Basic, 1984. p. 246.
29
Temin, Peter. The Jacksonian Economy p. 28.
30 Galbraith, John Kenneth. Money: Whence it Came, Where it Went. Boston: Houghton Mifflin, 1975. p.72.
28
“ I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on
that alone for the reduction of the administration of our government to the general principle of the Constitution, I mean
an additional article, taking from the federal government their power of borrowing.” 31
The Bank of the United States did have some good consequences. Since the banks charter
required it to maintain some gold and silver as a base for fractional reserve lending, it kept the
money supply from being expanded to a point of total loss of purchasing power. It was during this
period that “wildcat banks”, named for their locations in remote areas of their country, began to
flourish. Since The Bank of the United States was able to place restraints upon the practices of all
banks and also acted as a lender of last resort, it did prevent the money supply from growing as fast
as it would have otherwise and helped stabilize the monetary system by minimizing bank runs.
When the bank’s charter came up for renewal in 1811, it was defeated by a narrow margin. The
Jeffersonian democrats had not given up their fight for sound money, and the wildcat banks joined
them in the fight, not because they wanted sound money, but because they wanted a monetary
system with no restrictions at all. If the free market had been allowed to operate from that point on,
competition would have wiped out the most irresponsible banks and restored balance to the system,
but the War of 1812 soon began and Congress intervened in the nation’s banking once again to raise
funds for the war effort.
The War of 1812 was unpopular with the average citizen, so Congress did not have the
option of raising taxes to support it. The government needed the wildcat banks to create more
money to fund the war so they allowed them to print bank notes, without backing them up with a
percentage of gold or silver, and use the notes to purchase government bonds. The government
31
Letter to John Taylor, November 26, 1789. Quoted by Martin A. Larson, The Continuing Tax Rebellion (Old
Greenwich, CT: Devin-Adair, 1979) p. xii
29
then used the bank notes to purchase materials for the war effort. The states created enough money
to raise the national debt from $45 Million to $127 Million, tripling the money supply by 1816. 32
Instead of having the courage to let the market clean up the mess caused by the demise of
the First Bank of the United States, Congress decided to protect the banks by granting a twenty year
charter to a new lender of last resort, the Second Bank of the United States, in 1816. The Second
Bank of the United States, which was the nation’s third central bank, promised to continue the
tradition of regulating the money supply as The First Bank of the United States had done by not
accepting any notes from other banks unless they were redeemable in gold or silver. However, since
the First Bank had loosened the rules to raise money for the war and could not return the gesture of
backing up their own notes in the same manner, it was not able to maintain the same control over
the money supply. A post-war boom was in effect and the state banks were growing in number and
inflating the money supply through fractional reserve lending. By 1818, the number of banks had
doubled and the Second Bank of the United States was in danger of becoming insolvent and failing
to maintain the money supply requirements of its charter. It began a series of enormous contractions
in the money supply, in the name of stopping runaway inflation, by tightening the requirements for
new loans and calling in as many of the existing loans as possible. “The result of this contraction was
a rash of defaults, bankruptcies of business and manufacturers, and a liquidation of unsound
investments during the boom.”33 As the money supply shrunk, the country sank into its first
nationwide depression.
The 1820’s brought about a revival in the popularity of the sound money principles of the
Jeffersonian Republicans. Martin Van Buren and Andrew Jackson led a new coalition, the
Democratic Party, whose main agenda was to abolish the central bank. Jackson was elected
32
http://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo1.htm
Mystery, pp. 204-05
33Rothbard,
30
president in 1828, and he famously placed his entire political career on the line when he vetoed a
measure to renew the banks charter when he was up for reelection in 1832. Not only did Jackson
cite the unconstitutionality of the re-charter, he also sought to educate and gain the support of the
public by pointing out that the stock of the Bank was owned by the richest members of society and
a large portion of the stockholders were foreigners, which was a threat to national security. Jackson
was reelected by a large margin and one of his first steps to dismantle the central bank was to
remove federal deposits from the bank and place them into private, regional banks. The head of the
bank at the time, Nicholas Biddle, responded by contracting credit and calling in loans in order to
shrink the money supply, triggering a nationwide panic and depression that he then publically
blamed on Jackson’s removal of the deposits. Luckily, the truth about Biddle’s strategy leaked out
and the bank was defeated as Jackson’s name was cleared: “The economy was not the victim of
Jacksonian politics; Jackson’s policies were the victims of economic fluctuations.”34
In the years that followed, numerous monetary reforms were pushed through Congress in an
attempt to stabilize the banking system and compel the public to use gold and silver coin for
everyday transactions so that bank notes were only used for large transactions and could be more
easily controlled. However, people were increasingly using demand deposits, or checkbook money,
therefore limits on the use of bank notes were not effective at limiting the creation of new money
through fractional reserve lending. Safety funds were created during this time, which required each
bank to contribute a small percentage (usually 1-3%) of its capital toward a safety fund. The first
safety fund was established in New York in 1829 and was nearly wiped out by the banking crisis of
1837. When the fund was exhausted the solvent banks were forced to cover the deficits of the
insolvent ones, creating an incentive for insolvency.
34
Temin, Peter. The Jacksonian Economy. New York: Norton, 1969. p.196
31
The Era of “Free Banking” followed, which marked the conversion of banks from
corporations to private institutions. However, the rest of the monetary system, which consisted of
countless government regulations that blocked the free market remained unchanged, so the “free”
banks were no less fraudulent that the chartered banks. All that would have been necessary to truly
free the banking system would have been for the states for enforce banking contracts like any other
contract, which meant that the executives of any bank that could not redeem its currency in “hard”
money, when contractually obligated to do, so would go to prison for fraud. This would create an
incentive for banks to refrain from over-issuing their currency, and would make the citizens
responsible for being cautious and informed when selecting a bank. The economic chaos of this
“free banking” period has been cited as one of the main causes of the civil war.
The civil war ushered in a new experiment in fiat currency circulation, known as the
“greenback.” With active war within the States, and congress in need of funds to pay for its
expenses, the constitutionality of the matter was overlooked when Congress authorized the Treasury
to print $150 million bills of credit in 1862. They were declared legal tender for all private debts (but
not legal tender for government duties or taxes). President Lincoln had been a supporter of the
banking industry, advocating for Biddle’s Second Bank of the United States and asking Congress to
reestablish central banking. Clearly, with the country in a state of emergency, his convictions
changed when he enthusiastically supported the issuance of the greenback, which was federal fiat
currency, instead of bank fiat currency. He suddenly saw the usefulness in the ability of a
government to issue its own debt-free currency. Why should the government pay interest to the
banks to create bank fiat currency, when the government can just as easily print federal fiat currency
at no interest? In an abstract of Lincoln’s monetary policy that was prepared by the Legislative
Reference Service of the Library of Congress it states that Lincolns view on the matter was this:
32
“Government, possessing power to create and issue currency and credit as money and enjoying the right to withdraw
currency and credit from circulation by taxation and otherwise, need not and should not borrow capital at interest…The
privilege of creating and issuing money is not only the supreme prerogative of the government but it is the government’s
greatest creative opportunity.”35
Whatever the reason for the inconsistencies in Lincoln’s actions, it is clear that those in the
banking industry were not pleased with the greenbacks that denied them the right to benefit from
the government’s debt. The next year, in 1863, Congress passed the National Banking Act, as a plan
to raise more money for military expenses by creating a market for government bonds, and then
transforming those bonds into circulating money. From that point on, when a bank purchased
government bonds, it was able to immediately exchange them for an equal amount of U.S. bank
notes, which the government declared legal tender for payment of taxes and duties, but not for
private debts. The bank’s net cost for the bonds was nothing, and they were able to collect interest
on the bonds and loan out the bank notes at interest at the same time. Naturally, the banks bought
up all the government bonds as quickly as they were printed and the problem of how to fund the
war was solved! The National Banking Act required banks to keep a percentage (usually around
10%) of their deposits in the form of lawful money, such as gold and silver coin, and also the
Greenbacks, which were still in circulation. The banking act made it impossible from that point
forward for the federal government to get out of debt, “because to do so meant there would be no
bonds to back the national bank notes. To pay off the debt was to destroy the money supply.”36
The period between the National Banking Act charter of the 1860’s and the
Enactment of the Federal Reserve system in 1913 was one of tremendous economic volatility. The
notion of being able to create posterity by simply creating more money out of nothing prevailed.
35
Owen, Robert L. National Economy and the Banking System. Washington, D.C.: U. S. Government Printing Office,
1939. p.91.
36 Galbraith, John Kenneth. Money: Whence it Came, Where it Went. Boston: Houghton Mifflin, 1975. p.90.
33
The National Banking Act established a system of federally chartered banks which were granted a
monopoly in issuing bank notes, which the government agreed to accept as payment in taxes, and
the banks were allowed to back ninety percent of the bank notes with government bonds instead of
tangible wealth. The currency was repeatedly inflated through more unbridled fractional reserve
lending and followed each time by major contractions (deflation) of the money supply, otherwise
known as the “panics” of 1873, 1884, 1893, and 1907. Each time, inadequate bank reserves caused
banks to suspend payments in gold and silver coin. Congress reacted, not by increasing reserve
requirements, but by allowing a decrease! In 1874 legislation was passed that allowed the banks to
back their notes entirely with government bonds, which meant that bank notes no longer had any
backing at all, not even ten percent. This led the banks to create even more money, causing more
inflation that was followed by a contraction of credit. An attempt to control inflation was another
portion of the Banking Act of 1874 that allowed holders of Lincoln’s old greenbacks to be redeemed
for gold by the Treasury on demand. Historians claim that governmental control of the monetary
system was justified in the early 1900s because the booms and busts during his period were a result
of free and competitive banking. However, since the banks were granted monopoly power to print
bank notes, which the government agreed to accept for the payment of taxes, and since the
government subsidized the banks with government bonds, and was doing all that it could to
manipulate the money supply, this can hardly be considered a period of free and competitive
banking practices.
After the panic of 1907, private banker J.P. Morgan had come to the rescue as a lender of
last resort by convincing other New York City bankers to join him in pledging large sums of money
to make the system viable. Now congress was under great pressure to find a permanent
governmental solution to the reoccurrence of bank runs and widespread panic. In 1908, Nelson W.
Aldrich, a republican senator from Rhode Island, proposed the “Aldrich Plan”. The U.S. citizenry
34
strongly opposed this plan out of fear that it would become a tool of the “money trust”, the same
rich and powerful financiers of New York City that had propped up the system after the bank runs.
“Central control over financial resources was far advanced by 1910. In the United States, there were
two focal points of control: the Morgan Group and the Rockefeller Group…In Europe, the same
process had proceeded even further and had coalesced in the Rothschild Group and the Warburg
Group.”37 In the winter of 1910, Senator Aldrich attended a secret meeting in Jekyll Island, GA with
the Assistant Secretary of the U.S. Treasury, Abraham Piatt Andrew, and representatives from all of
the major banks, from both the U.S. and Europe, in attendance. 38 One of the attendees, Paul
Warburg, a representative of the Rothschild bank in England, admitted in his book about the
formation of the Federal Reserve eighteen years later: “The results of the meeting were entirely
confidential….Senator Aldrich pledged all participants to secrecy”39 Three years after this meeting, a
plan almost identical to the “Aldrich Plan” resurfaced as the Federal Reserve Act, which was enacted
by Congress just a little over 100 years ago, on December 23, 1913. Congress and the public were
assured that the Act would decentralize power away from Wall Street; but within a few years of its
creation, The Federal Reserve Bank of New York “became the fountainhead” of The Federal
Reserve’s twelve regional banks and was headed by Benjamin Strong, former head of J.P. Morgan’s
Bankers Trust Co., and one of the original authors of the Federal Reserve Act on Jekyll Island. 40
Our current central banking system began when the Federal Reserve Act granted the Federal
Reserve (the Fed), a federally-sponsored banking cartel, completely separate from the Federal
Government, the charter to issue the United States currency by simply printing Federal Reserve
Notes and lending them into existence. The stockholders of the Fed were to be held by its member
37
Griffin, G., Edward p.6
Griffin, G. Edward, The Creature from Jekyl l Island . pp 3-24.
39 Warburg, Paul M. The Federal Reserve System, Its Origin and Growth. New York: Arno, 1975. p.58
40 Lundberg, Americas Sixty Families p.122
38
35
banks, with no oversight from the U.S. government or from the public, and this remains the case
today.41 There is actually nothing federal about the Fed, and they have no actual reserves other than
some extravagantly designed pieces of paper. One of the most outspoken critics of the Federal
Reserve Act was Rep. Charles A. Lindberg (R-MN) said this after the act was signed into law: “The
financial system…has been turned over to…the Federal Reserve Board. That board administers the
finance system by authority of a purely profiteering group. The system is private, conducted for the
sole purpose of obtaining the greatest possible profits from the use of other people’s money.”42
The Federal Reserve Act was to provide stability for the dollar by becoming the lender of
last resort for banks in the event of financial panic. However, during the Great Depression, The Fed
failed to halt another disastrous banking collapse in the 1930’s, which resulted in widespread bank
failures. Instead of creating money to avoid bank runs as The Fed was chartered and entrusted to
do, The Fed shrank the money supply by eight billion dollars, over 1/3 of demand deposits, 43 failing
to protect the integrity of dollar and public confidence in the banking system. Congressman Louis
T. McFadden R-PA), former chairman of the House Banking and Currency Committee during the
Great Depression stated in 1932: "We have, in this country, one of the most corrupt institutions the
world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished
the people of the United States and has practically bankrupted our government. It has done this
through the corrupt practices of the moneyed vultures who control it."
Instead of allowing the charter to expire in 1933 as scheduled, President Franklin D.
Roosevelt took drastic measures to counter the falling money supply. He signed an executive order44
41
"The regional Federal Reserve banks are not government agencies. ...but are independent, privately owned and locally controlled
corporations." -- Lewis vs. United States, 680 F. 2d 1239 9th Circuit 1982
42
43
44
Still, William T. No More National Debt. St. Petersburg, FL: Reinhardt and Still, 2011. Chapter 24.
Fisher, Irving. 100% Money. New York: Adelphi, 1936. p.9
Executive order 6102, 1933.
36
to confiscate all privately-held gold, stating that the hoarding of gold was stalling economic growth
and worsening the depression.
All citizens were to deliver all but a small allowance of their gold to the Federal Reserve in
exchange for $20.67 per troy ounce if they were to avoid the penalty of a $10,000 fine and up to 510 years imprisonment! After the seizure, the price of gold for international transactions was raised
to $35 per ounce, bonds payable in gold were nullified by the Supreme Court, and the resulting
37
profit was used to stabilize the exchange value of the dollar, “protect the currency system of the U.S.
[and to] provide for the better use of the monetary gold stock of the U.S”45 The Banking Act of
1935 renewed The Fed’s charter and centralized power from the regional reserve banks to the
Federal Reserve Board in Washington, DC. From this point on, the Secretary of the Treasury, who
had served as the chairman of the Federal Reserve Board and comptroller of the currency, no longer
served with The Fed and the Board meetings were held in a newly constructed building on
Constitution Avenue instead of being held at the Treasury Department . “The [Act] changed the
titles of the Systems leaders to signify the centralization of authority at the Board of Governors and
the reduction in the independence and stature of the twelve Federal Reserve District Banks”46
To end the economic turmoil of the depression and World War II and to provide a
foundation for global recovery, a conference was held in Bretton Woods, NH in 1944 with all of the
major allied powers attending. Since the U.S. economy represented nearly half of global production,
the dollar was made the global reserve currency and all other currencies were given fixed rates of
exchange to the dollar, which in turn was redeemable for gold at $35 per ounce. The Bretton Woods
system ushered in a period of prosperity and rapid economic recovery as countries agreed to regulate
the expansion of their own currencies to maintain the fixed exchange rates. But there was a terrible
flaw in the system: Nothing in the Bretton Woods agreement prevented the Fed from expanding the
U.S. currency. Because of this flaw the gold backing behind each dollar steadily declined, until there
was not enough gold to back all of the dollars; although, this did provide at least some restraint to
just how far the currency could be expanded. During the Vietnam War, the U.S. was running budget
deficits and flooding the world with dollars. The French became suspicious that the U.S. would not
be able to honor its Bretton Woods obligations and began to exchange their surplus dollars for gold,
45
Gold Reserve Act of 1934
Friedman, Milton, and Anna Jacobson. Schwartz. A Monetary History of the United States: 1867-1960. Princeton:
Princeton UP, 1971. pp.445-6.
46
38
greatly reducing the U.S. Treasury's gold stock. President Nixon reacted by “closing the gold
window,” in 1971, which impacted the whole world by destroying the foundation of the Bretton
Woods gold standard.
Since we have already learned that all currency in the U.S. is created out of debt, what do you
suppose happened to U.S. debt levels once the limitations of the gold standard were removed? This
is a chart of U.S. federal debt as a percentage of GDP from the 1870s through 2011.
Debt levels began steadily increasing after the termination of the Bretton Woods system in
the 1970s and around 1980 the graph makes a sharp turn into the exponential growth oblivion of
the last three decades. When our current president took office our national debt was 9.6 trillion,
which since then has increased by 7.9 trillion, an 82% increase, to reach our current level of 17.5
39
trillion!!!47 Over the past several years we have seen the highest and most rapid accumulation of
federal debt in our entire history.
Since all money is loaned into existence, it is no surprise that the growth in the amount of
money supply since the gold standard ended, both bank notes and checkbook money (represented
best by M2 and M3), exhibits a growth pattern almost identical to the growth in U.S. debt. It’s
mind-boggling to observe that it took the U.S. until the early 1970’s, almost 200 years, to generate 1
trillion dollars of money stock. Our last trillion dollars (as measured by M2 money supply) was
created in the last 19 months!48 Currently the Federal Reserve is “tapering” back its Quantitative
Easing program to a “mere” 75 billion per month, which creates money to buy “junk” mortgage
backed securities We should stop now and ask ourselves? What will it be like to live here in a few
years if this exponential growth in the money supply and the national debt continues? How will this
end? Hyperinflation? Another devastating debt bubble? Destruction of the Dollar as the world’s
reserve currency? A complete currency overhaul?
47
48
Usdebtclock.org, accessed 4/1/14
Source: Federal Reserve http://www.tradingeconomics.com/united-states/money-supply-m2
40
As we have seen during our brief journey into the history of fractional reserve lending and
centralized banking, the central banking mechanism “unites the interest and credit of rich individuals
with those of the state”49 just as Alexander Hamilton envisioned that it would when he was an
advocate for our second central bank, the Bank of the United States. Each time a central bank was
chartered in the U.S., it was funded by the wealthy, and those same wealthy investors also became
the stockholders of the bank. Allowing governments to borrow our money into existence through
this mechanism makes our government completely dependent on the banking system not only for its
funding, but also for the general well-being of the economy.
49
(See page 29)
41
Chapter IV: Constitutional Wisdom
When we observe the monetary chaos around us today- the declining value of the dollar, the
collapse of financial institutions, the raising of debt limits, the bailouts….we are forced to ask
ourselves: How did we get into this mess? To find out how we got here, we need to know where we
started, and a good place to begin is by traveling back in time once more, to the Constitutional
Convention of 1787. One of the chief points of issue at the convention was how to establish the
nation’s currency. This was a timely topic because all of the colonies had engaged in printing “bills
of credit” to finance military costs on numerous occasions, beginning with Massachusetts using its
own paper money to finance military raids against the French in 1690. These early colonial
experiments in the issue of fiat currencies all ended in the quantity of the notes escalating to the
point of being worthless pieces of paper. The latest colonial experiment in the issue of soon-to-beworthless fiat currency was taking place at the very time of the Constitutional Convention. The
monetary unit created to fund the Revolutionary War was known as the “Continental.”
Some examples of Continental currency:
Source: Wikipedia.com accessed 11/1/2013
In 1775, continentals were valued at one dollar in gold; but after the supply of Continentals
in circulation soared from 12 million to 125 million by 1779, it was worth less than one penny,
42
leading to the coining of the phrase “Not worth a continental”. Since the inflationary tour was
already well under way, they couldn’t help but be reminded of the urgent need for economic
stability. Outside the doors of the convention, there were angry mobs threatening the delegates.
Many businesses in Philadelphia had gone bankrupt and there was looting in the streets. The
delegates to the convention set out to construct a monetary framework in the Constitution that
would prevent the disastrous inflationary consequences of printing endless amounts of paper
currency.
Our constitution , Article I, Sections 8 and 10 reads as follows:
“Powers granted to Congress…to borrow money... to coin money, regulate the value thereof, and of foreign
coin, and to fix the standard of weights and measures.
No state shall…coin money; emit bills of credit; or make anything but gold and silver coin a tender in payment
of debts.”
Did the founding fathers intend for Congress to have the power to print paper money from
debt? Much of the Constitution was gathered from the Articles of Confederation, which contained
the clause “The Legislature of the United States shall have the power to borrow money and emit
bills of credit.” In the summer of 1787, there was a lively debate that lasted for several days
regarding which of these two powers, if either, should be given to Congress. Because the disdain for
paper currency was still so fresh in the minds of the delegates, “It was moved and seconded to strike
out the words ‘and emit bills of credit’ and the motion [passed by a margin of four to one]”50 They
did not, however, choose to explicitly forbid the issuance of “bills of credit” as they had done for
the states, and they did chose to include the power to borrow money. If only they had spent a few
more days or weeks to consider the possible ramifications of these choices! As we saw when we
50
Bancroft, George. A Plea for the Constitution of the United States, Wounded in the House of Its Guardians. Sewanee, TN:
Spencer Judd, 1982. pp.39,40
43
were examining early U.S. banking history, after the Constitution was drafted and the central
banking mechanism had a chance to take hold of the economy, the power to borrow money was
used to create the same inflationary result as the fiat currencies the delegates were trying to prevent.
At any rate, they decided to allow Congress the power to “coin” money, and regulate its value, but
did not specify what type of money it should be. In those times “coin” was often used to describe
the creation of something, so the phrase “to coin money” did not restrict us to the creation of
metallic money. For instance, “In 1720, economist John Law proposed ‘Coining Notes of one
Pound’ and otherwise ‘coining paper money’”51 At that time, the Spanish silver dollar, known as
“pieces of eight”, had been the official monetary unit of the states since 1785 .The power to fix the
standard of units and measures permitted the federal government to continue determining the unit
of account for the currency, which was later clarified at 371.25 grains of silver per dollar.
What would the founding fathers of this country think of our currency today? They would
be horrified to learn that our monetary policy has become an instrument used to evade the
symptoms of budgetary irresponsibility. If the founding fathers had known how detrimental the
“borrowing of money” by the federal government would be to “regulating its value” they would not
have included it. In fact they would have prohibited it! As we discovered earlier, agreeing to allow
government debt was Thomas Jefferson’s biggest Constitutional regret. (see page 30)
There is plenty of evidence demonstrating the founding fathers’ convictions that usury went
against the natural order of our world and interfered with freedom.
In February of 1787, George Washington wrote the following in a letter to Henry Knox:
The necessity arising from a want of [currency] is represented as greater than it really is. I contend that it is by
the substance, not the shadow of a thing, we are to be benefited. The wisdom of man, in my humble opinion,
51
Still, William T. No More National Debt. St. Petersburg, FL: Reinhardt and Still, 2011. Loc 2882 of 10914
44
cannot at this time devise a plan by which the credit of paper money would be long supported;
consequently,
depreciation keeps pace with the quantity of the emission, and articles for which it is
exchanged rise in a greater ratio than the sinking value of the money. Wherein, then, is the farmer, the planter,
the artisan benefited? An
evil equally great is the door it immediately opens for speculation, by which the least
designing and perhaps
most valuable part of the community are preyed upon by the more knowing and
crafty speculators.”52
In a letter to Thomas Jefferson, George Washington writes:
“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the
honest, and open the door to every species of fraud and injustice.”
Thomas Jefferson observed how borrowing money at the national level compromises the liberty of
the next generation:
“The system of banking, a blot left in all our Constitutions, which, if not covered, will end in their
destruction…..I sincerely believe that banking institutions are more dangerous than standing armies, and that
the principle of spending money to be paid by posterity… is but swindling futurity on a large scale.”53
Leading architect of the constitution, James Madison, declared:
“Paper money is unjust. It is unconstitutional, for it affects the rights of property as much as taking away equal
value in land.”
Indeed, the system fails to provide a store of value in our currency, which is essential to the valuation
of property and property rights.
Furthermore, James Madison frequently referred to those behind a central bank scheme as the
“money changers” and strongly criticized their actions. He drew a distinction between private money
interests and those who supported the constitution with this statement:
“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means
possible to maintain their control over governments by controlling money and its issuance.” 54
52
53
Washington to Stone, February 16, 1787. Quoted by Bancroft, pp.231.32
Thomas Jefferson, writings.
45
“The Founders created our Constitution in order to secure each person's Creator endowed
rights to life, liberty, and property.”55 Being the scholarly gentleman that they were, the founders
were well-schooled in the natural law notions of Cicero, Blackstone, Coke, Locke, and the like, and
held predominantly Christian values. They realized that our creator-endowed rights must be
protected by a code of law which is harmonious with the higher law of the Creator. They were well
aware that profiting from money itself and not the fruit of one’s labor, especially when
spontaneously created money was involved, went against the natural order of the economy. In the
words of Thomas Jefferson: “No one has a natural right to the trade of a money lender, but he who has
the money to lend.”56
Writings of James Madison, v2. p.14
Edlin, Douglas E. Judicial Review without a Constitution. Polity 38.3 (2006): 345-68. JSTOR 3877071.
56 Thomas Jefferson, writings. p.79
54
55
46
Chapter VI: The Currency Revolution
Following our examination of how our currencies became what they are today, we can come
to this conclusion: our currency is completely based on usury. Our current monetary system and
banking practices are history’s most recent manifestation of the truth: that usury goes against the
natural order of our world. Our country was founded on natural law principles set forth by those
brave individuals who authored our constitution and they would gasp in horror if they could see
what has been done to our currency. Under our current monetary system, our government has
stolen nearly 18 trillion dollars from future generations and continues to add over 100 million to that
total every single day. It is mathematically impossible for this debt to be paid back, since eliminating
this debt would eliminate our money supply. In the forward to Irving Fisher’s book 100% Money,
Robert Hemphill, former credit manager of the Federal Reserve in Atlanta, summed up our
situation:
“If all the bank loans were paid, no one could have a bank deposit and there would not be a dollar of coin or currency in
circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to
borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous;
if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture,
the tragic absurdity of our hopeless situation is almost incredible- but there it is.”57
It took from the birth of this nation until 1973, nearly 200 years, to generate one trillion
dollars of money stock. So for the last 31 years we have been on a 17 trillion dollar spending spree.
A spending spree that has created the most amazing standard of living the world has ever known
and fueled miraculous technological advances. But this prosperity is not real. Maybe we have been
living beyond our means for so long, that we are not sure what real is anymore!
Our modern currencies, based on fractional reserve lending and central banking, rely on
unsustainable growth in the money supply and are no more stable or permanent than the interest
57
Fisher, Irving. 100% Money. New York: Adelphi, 1936.p.22
47
bearing barley loans that Enmetena banned over 3000 years ago. The Fed has no intention on
limiting the growth of the money supply, over 90% of which is created through fractional reserve
lending by regional and commercial banks. Economist Irving Fisher devised a plan in the 1930’s that
would make our money “honest” again by requiring banks to keep 100% reserves on all deposits.
Regrettably, Ben Bernake, former Federal Reserve Chairman, confirmed in 2010 at the height of the
financial crisis that the Fed wants to eliminate reserve requirements instead of increasing them! “The
[Fed] believes it is possible that, ultimately, its operating framework will allow the elimination of
minimum reserve requirements, which impose costs and distortions on the banking system.”58
Furthermore, over the past 25 years relationships between growth in the money supply and
measures of performance in the money supply, such as GDP and price levels, have broken down to
the point that the Fed is no longer setting targets for money supply growth or even reporting M3
money supply levels since “money supply growth does not provide a useful benchmark for the
conduct of monetary policy.”59
We are not on this currency roller coaster ride alone. The global nature of our economy has
many other countries on a steep upward cliff of exponential debt and money growth right along
with us, and many nations have defaulted on debt or are at risk of default in the near future. If the
value of the dollar declines, other countries may be forced to devalue their currencies in order to
remain competitive. Although the problem of usury has been repeating itself for centuries, the
worlds un-backed, debt-based, intertwined currency system is only 43 years old. At this point, the
U.S. dollar is only the reserve currency of the world as a matter of convenience. Its framework is
well established, and the Feds New York-based FEDWIRE electronic payments system processing
between 1-2 trillion transactions per day! Since only the U.S. is able to use its reserve currency status
58
59
http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm
http://www.newyorkfed.org/aboutthefed/fedpoint/fed49.html
48
to expand its money supply and pay for its trade deficits, it will become increasingly inconvenient for
the rest of the world to tie their currencies to ours.
It is no surprise that demand for alternatives to debt based money and banking are on the
rise in every part of the world. One example of this resides in the inception of Islamic Banking,
which began about three decades ago. In order to be compliant with Islamic religious practices,
Islamic Banks conduct profit and loss sharing arrangements that balance risk between borrower and
lender instead of charging interest on loans. The value of Islamic banking assets worldwide was 800
billion in 200860 and expected to rise at a rate of 25%, higher than all other sectors of banking
worldwide, with total assets of Islamic Banks worldwide currently at 1.2 trillion.61
Much of the demand for alternative currencies arises from the fact that our cumbersome,
debt-laden currency is soon-to-become obsolete! Cash is already largely obsolete with over 90% of
transactions both in the U.S. and abroad occurring with electronic funds. The need for less
expensive, more efficient transaction methods is on the rise. In the U.S. the largest growth in the
electronic payments industry are those involving money transfer services. Walmart’s recent
announcement that it will begin to offer money transfer services similar to those of Western Union
and Money Gram will undercut industry price levels by 50% by promising only two fee levels for
transfers.62 Some global brands, like Starbucks are integrating mobile payments with in-store
experiences and customer loyalty incentives. New payment technologies based on social media, like
Pay with Square, are so efficient they make buying a cup of coffee feel a little like shoplifting. Your
name, regular product selections and payment method automatically load onto the “cashier’s”
60
Kettel, Brian “Islamic Finance in a nutshell” p.2
http://muslim-academy.com/a-predicted-rise-in-islamic-banks/
62 http://www.businessweek.com/articles/2014-04-24/wal-mart-brings-falling-prices-to-the-volatile-world-of-moneytransfers
61
49
computer screen the minute you walk in the door with your mobile phone, and you leave the store
with your usual cup of coffee without ever even reaching for your wallet.
Although people in the U.S. have been reluctant to adopt mobile payment wallets and
electronic money transfers as their primary currency, the mobile and online payment market outside
of North America is gigantic! Asia/Pacific’s mobile payments market is expected to overtake Africa
to become the largest region by transaction value, reaching $165 billion in the next 2 years.63 Mobile
money transfers made up the majority (71% in 2013) of mobile payment transactions,64 Users are
increasingly using money transfers for small amounts, because the transaction costs are much lower
than traditional banking services. For millions of consumers worldwide mobile phones are
transformed into portable bank accounts through companies like Vodacom’s “M-Pesa”, the world’s
leading mobile money network. M-Pesa allows consumersto add funds to their accounts at local
retailers, and then transfer funds to others or pay bills with their cell phones. “It is so successful that
two thirds of the Kenyan population, 17.1 million customers, filters 13 billion, more than a quarter
of the country’s gross domestic product, through M-Pesa”65
However, for a business to operate globally it would have to navigate hundreds of payment
systems to reach everyone in the worldwide market. Global retail brands, like Amazon, have
payment processing platforms that have evolved in sophistication in order to quickly handle a wide
variety of payments, including mobile and online payment methods. However, transactions between
smaller businesses or individuals in the global economy are reduced to transfer services like Pay Pal
are quite expensive and can take up to 30 days to clear. With increased global communication
through social media platforms like Facebook, Pinterest and Twitter, there is a tendency for folks in
63
Transaction World Magazine October 2013 volume 13 issue 10 p.28
Transaction World Magazine September 2013 volume 13 issue 9. p.23
65 Transaction World Magazine October 2013 volume 13 issue 10 p.29
64
50
the global market to look for ways to transfer payments directly to one another, without going
through a third party like Amazon or Pay Pal and paying the fees and enduring the long waits for
payments to clear associated with them.
Various alternative currencies have been sprouting up all over the globe, not only on
a global level but also on national, local and small community levels as well. The term “community
currency” can be used synonymously for local, regional, complementary, alternative, and private
currencies. Since these terms have numerous meanings to numerous people, have many different
designs and serve many purposes beyond those served by most currency systems today, it may be
useful to define alternative currencies as they will be used here toward our goal of defining and
creating an ideal currency. An alternative currency is any currency that is used as an alternative to the
dominant national or multinational currency. If the currency is used or designed to work in
combination with the dominant currency, it is called a complementary currency. Most
complementary currencies are local currencies because they are limited to a specific area or region. A
pure barter system can even be considered an alternative currency, even though only items are
traded without the use of any currency whatsoever. One of the most common alternative currencies
is gold, for which demand always dramatically increases in times of economic hardship.
Issues often arise around alternative currencies related to paying government taxes. While
some currencies are considered tax-exempt, most are considered fully taxable with the tax being
payable only in the national currency However, in order for a alternative currency to be taxed, it has
to be recognized as an official currency by the governing authority issuing the tax.
Many alternative currencies attempt to achieve more representation of labor and are based
on time. LETS (which stands for Local Exchange Trading System) is a special form of barter that
allows participants to trade items for points, with each point representing one hour of human work.
51
LETS is a locally initiated, democratically organized, not-for-profit community enterprise first
originated and run by Michael Linton in Courtenay, British Columbia, Canada and an adjunct to the
national currency. It can be difficult for participants to adjust to a time-based currency like LETS
because unlike national currencies, that are typically difficult to earn and extremely easy to spend,
they are comparatively easy to earn and hard to spend. Each hour of work is valued when both
parties in the transaction agree to its point value. LETS is a type of mutual credit that involves
openly keeping track of each users balance, whether it is positive or negative. The resulting effect of
a negative balance is similar to a loan, but with no interest. In fact, interest-free loans are one of the
main benefits. There is the possibility that someone could run up a negative balance and then leave
the system, but since most LETS communities place a cap on negative balances and keep groups
small, the community holds people accountable. Time dollars, are also created via mutual credit, and
are most popular in retirement communities and community service groups because they support a
“favor” economy. Unlike LETS, each time dollar is worth one hour no matter how difficult the job
or how qualified the worker is, so it only functions when everyone in the system considers their time
and effort to be equal. Another alternative currency, known as ROCS, uses demurrage rates, similar
to a negative interest rate, to keep the currency circulating by discounting future cash flow. The main
economic advantage of mutual credit systems is that they are self regulating; the money supply
expands and contracts as needed without the need for a central governing authority.
A local currency is a currency that is not backed by the national government, is designed to
complement the national currency, and is intended to facilitate trade in a small area. Advocates of a
local currency argue that an entire country may not always be an optimum currency area. An
example of a local currency is the “Eighth Hour Note” of Ithica, NY “It is money based on sharing,
52
not scarcity”66 Local currencies like Ithica Hours, seek to strengthen the local economy by keeping
funds in the community, instilling pride in community and building social connections. Joining the
network entails a $10 fee, listing your name in the HOURS directory and 4 “HOUR” bills to get you
started. The currency has been operating successfully since 1991 with over 900 retailers participating
and 100,000 Hours in circulation.
We now have an example of a complementary currency at the national level. It is The
Canadian Royal Mint’s, Mint Chip, which is currently in the experimental phase of development.67
The Mint has partnered with social media experts and software developers to create a digital mobile
payments currency that is similar to using Canadian cash, by which it is fully backed. 500 volunteer
participants have been selected and are currently providing feedback as they use the currency in an
R&D pilot program. Mark Brule, the CTO of the Mint, is the head of the initiative and feels that the
Mint’s duty is to support trade and commerce, which is moving into the digital arena. The
development of Mint Chip marks the first attempt at launching a digital currency by a national
government or mint-backed environment.
On the global level we have Bitcoin, which is a digital decentralized, peer-to-peer, cryptocurrency. Crypto refers to the fact that Bitcoin technology is based on the cryptography branch of
mathematics. Bitcoins have to be “mined” into existence using advanced software programs to solve
complex mathematical problems that become increasingly more complex. Other digital currencies
like Linden dollars of the Second Life Economy68, QQ Coins in China69, and World of Warcraft
Gold Trading70, have gained global traction in the past, but Bitcoin is now officially the largest digital
currency on the planet topping out at $12 billion last November and currently valued at around $10
66
http://www.ithacahours.org/
www.mintchipchallenge.com
68 Worth $567 million in 2007
69 $900 million in market value-2006
70 The World of Warcraft (WoW) Gold Trading economy was worth 3 billion in 2011- Utopianist April, 2011.
67
53
billion. Bitcoin has a high level of fungibility, as bitcoins can be divided up to eight decimal places,
but since only a limited number of mathematical problems can be solved within the confines of the
Bitcoin system, scarcity is achieved. Growth in Bitcoin supply is listed on a public schedule and will
grow to an arbitrarily chosen number of 21 million by the year 2140. Just as a ledger can be used to
record transfers of conventional currency, all Bitcoin transfers are recorded in a computer file that
acts as a ledger called the block chain. Where a conventional ledger records the transfer of actual
dollar bills or notes that exist apart from it, Bitcoins are simply entries in the block chain and do not
exist outside of it.71 Bitcoin fits the bill for individuals wanting to trade globally with one another
because it costs practically nothing, and the receiver of Bitcoin can see that it has been sent in
seconds, with final irreversible approvable taking place within minutes. Bitcoin uses public-key
cryptograpy, where two cryptographic keys, one public and one private, are generated; but due to the
public nature of Bitcoin, linking transactions to individuals or companies is possible even though
names are not used in transactions. An article in The Economist argued that Bitcoin is not a real
currency because while it does act as a medium of exchange, “the Bitcoin market currently suffers
from volatility, limiting the ability of bitcoins to act as a stable store of value.”72 Hmmmm….That is
interesting…. At any rate, a new global digital currency, Litecoin, is on the rise. Litecoin is being
introduced as silver to bitcoin’s gold because it is easier to mine, more plentiful in terms of how
many total coins can be mined, and it is designed for smaller everyday transactions.
“Technology enthusiasts and venture capitalists are pitching digital currencies as fast and
cheap alternatives to traditional financial systems, in which middlemen such as networks, merchant
acquirers and banks take a cut. Backers also argue that instruments such as Bitcoin may be of use to
71
72
Ramzan, Zulfikar. "Bitcoin: What is it?". The Khan Academy. Retrieved 5 April 2014.
"Bitcoin: Bitcoin under pressure". The Economist. 30 November 2013. Retrieved 30 November 201372
54
people and businesses in countries with unstable currencies.”73 However, many countries are
resisting digital currencies, warning that the instruments suffer from volatility, can be exploited for
illicit activities, and are vulnerable to theft via hacking.
Alternative currencies and banking methods are all based on the need for currencies to be
more “robust”: that is, more efficient, less expensive, more functional to the people actually using
them, and less prone to external shocks and government regulation. Just as paper currencies
transformed the way business was conducted during the Industrial Revolution, electronic currencies
are transforming the way we use and think about money. "In the next 10 years, we'll see more
disruption and changes to the banking and financial industry than we've seen in the preceding 100
years"74
Like all technologies, alternative currency methods can be used for good or they can be used
for bad. How can we harness the technology of the mobile payments industry and combine that
with what we know about the functions of a currency, the history of banking, the problem of usury
and what our founding fathers had to say about money? Here are just a few ideas…..
73
http://www.bloomberg.com/news/2014-04-24/bitcoin-wannabe-litecoin-emerges-as-low-price-challenger.html
74
King, Brett. Breaking Banks: The Innovators, Rogues, and Strategists Rebooting Banking. S.l.: John Wiley, 2014. p. 189
55
Our new ideal American currency will be known as “Vie.”
“Vie”- a French word meaning life, lifetime, existence, useful life, activity, liveliness.
Since our Constitution is based on principles of natural law, our new currency will be based
upon life and will seek to coincide with the natural order of the world. To accomplish this, we will
employ the art of biomimicry. “Biomimicry…is a design discipline that seeks sustainable solutions
by emulating nature’s time tested patterns and strategies.”75 In microbiology, ATP is a complex
nanomachine that is commonly known as the primary energy “currency” of the cell.” ATP, an
abbreviation for adenosine triphosphate, is a critically important macromolecule- arguably “second
in importance only to DNA.”76 This complex molecule is critical for all life from the simplest to the
most complex. All fuel sources in nature produce ATP, which in turn fuels virtually every activity, of
every cell, in every organism on earth. ATP is not a fuel or a store of energy set aside for some
75
76
http://www.asknature.org/article/view/what_is_biomimicry
Trefil, James. 1001 Things everyone should know about science. Doubleday. New York. 1992. p.93
56
future need, it is an energy-coupling agent that is produced by one set of reactions and then almost
immediately consumed by another. ATP is formed as it is needed for cellular function: for either
transport work; moving substances across cell membranes, mechanical work; supplying the energy
needed for muscle contraction, or chemical work; supplying the energy needed to synthesize all of
the other types of macromolecules that cells need to exist. “The ATP energy system is quick, highly
efficient, produces a rapid turnover of ATP, and can rapidly respond to energy demand changes”77
Even viruses rely on an ATP molecule identical to that used in humans. Through a series of
complex chemical reactions, ATP is constantly used by the cells and then recycled. The reason ATP
stores energy is because it doesn't remain ATP for long. It quickly turns into something else, ADP,
adenosine diphosphate, when the energy is utilized. There must always be an optimum balance
between ATP and ADP and the body must be supplied with adequate oxygen to facilitate this
process. Since ATP is constantly being used and recycled, complex organisms use an alternative
method for storing long term energy. In the human body, long term energy is stored in fat cells.
ATP, the currency of the cell, serves as an optimal model for our ideal currency. Our new
currency would be liquid and efficient enough to rapidly respond to energy changes needed to fuel
the economy. The quantity of money, represented by ATP, would represent the human effort and
the total income of the nation which would always be balanced with our population and natural
resources, represented by ADP in our biological model. Growth in the economy, either in
population or in production, would necessitate more currency, which could be spent into the
economy for the good of society. This currency could be spent for infrastructure projects, education,
military spending, cultural and recreation centers, health care research, whatever was most needed by
the people, but all spending would be fully disclosed to the public. GDP (Gross Domestic Product)
and price levels would once more be a useful tool in determining an adequate currency stock.
77
Goodsell, David S. Our Molecular Nature / the Body's Motors, Machines, and Messages. New York: Copernicus, 1996. p.79.
57
Our first order of business in creating our new currency system is to rescind the power given
to our government to borrow, granting Mr. Jefferson the “one more amendment” he wished he
could attain. Government debt steals wealth and freedom from future generations and borrowing
would be unnecessary anyway, since the government would use its “greatest creative opportunity,”
as Abraham Lincoln called it, to issue its own debt-free currency. Instead of lending our currency
into the system, it would be spent into the system.78 Lending would only be allowed between private
groups and individuals and only on money that actually exists, so it would be a 100% reserve system.
Lending would be a contractual agreement between borrower and lender and the interest rate would
be adjusted to prevent a buildup of excessive debt, even if that meant adjusting it to 0%!
Since we would no longer be focused on trying to balance government spending with
unlimited debt, we would have another amazing, creative opportunity: the freedom to balance our
currency with whatever we choose! The quantity of Vie in circulation could then be based on the
natural limits of our population and our natural resources, and would most certainly be based at least
in part, if not completely, on population and the labor force. Each unit of Vie might be equivalent to
one hour of time spent in labor, although nothing would prevent the market from assigning a value
of more or less than one hour of Vie to a particular job or task.
The power to “coin”, or create, money and “regulate the value thereof” would be returned
to the people, where it properly belongs. An elected Currency Board, the Secretary of the Treasury
and representatives from each state, would be responsible for managing the quantity of currency in
circulation so that a healthy separation of powers was achieved. A currency board would be created
by Congress to analyze the data from the flow of Vie in the economy. This would be done in the
interest of the people and would be completely transparent, with all discussions and decisions made
78
Still, William T. No More National Debt. St. Petersburg, FL: Reinhardt and Still, 2011.
58
public immediately. The quantity would never be increased for emergencies, not even a war. War
should be prepared for and saved for, so that if there was ever an eminent threat, we would be
ready. Adding to the amount of Vie in circulation by Congress would only be permissible when the
amount in circulation was no longer sufficient to facilitate trade and commerce. Most importantly,
there would be a clear, published, intentional, optimal LIMIT to how much currency was in the
economy.
Since the quantity and value of Vie would remain very stable, it would function very well as a
store of value; but that would not be its’ primary function. The primary function of Vie would be as
a medium of exchange. Demurrage could be used to keep units of Vie circulating and prevent the
buildup of debt. The people would be free to use other methods, such as precious metals and
property ownership to store value, just as our body uses fat to store energy in the long term. Since
the quantity of Vie would remain constant except for gradual, subtle increases as needed, property
values would remain more stable over time. To encourage the storage of wealth, U.S. citizens would
be able to have gold and silver coined by the mint for a small charge representing only the cost of
production, or for an additional fee they could exchange gold and silver for coins of equivalent
value. Similar legislation was passed as part of the original Coinage Act of 1792 that established our
mint and regulated coinage in the U.S. This complementary currency could serve as a backup
currency in an emergency or loss of electrical power. Of course, tangible wealth; like gold, silver, or
property, could also be purchased with Vie so that citizens could store wealth for themselves or
future generations. On the national level, we would store wealth in a similar fashion.
Vie would be a completely digital currency. Vie would use the technology of today’s mobile
payments industry to verify the validity of transactions in real time so it would be very efficient and
secure. Both a public and private record of transactions would be generated with only the owner of
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the funds and the bank processing the transaction being able to access personal accounts. The public
record would provide a record of the general use and velocity of money that would be used to
ensure that the quantity in circulation was facilitating trade and commerce. Personal Privacy would
never be compromised by releasing an individual’s private spending record. Any need that arose to
release private financial information for the purpose of tracking fraud or embezzlement would have
to go through the same channels that we currently have in place, so probable cause would have to be
demonstrated.
It is odd that most people, even though they use money every day, have no idea how it is
created. A lot of people automatically assume that our federal government creates our money as it is
needed. But we “followed the money” right back to its very creation and came to the realization that
all new currency in the U.S. is created out of debt which obligates the public to private banks and
makes the public and those in government dependent on the banks for economic stability, which the
banks are notorious for not providing. Because of the inefficiencies and lack of fluidity this has
caused in our monetary system, there is enormous demand for an alternative. We have seen how
technology is changing currency transactions in the global economy by making them more
streamlined and internet based. We could use this technology to create a currency that would
balance individual privacy with public transparency in order to achieve liberty, and still take into
consideration the inherent limitations of our natural environment and our labor force. A currency
system can be designed for any objective. Now all we have to do is determine our objectives and
demand a new, ideal currency that helps us reach them.
60
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